Equity Crowdfunding for Investors. Matthew R. Nutting

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СКАЧАТЬ consumers, and investors (and their lawyers) eager to exploit new opportunities. Crowdfunding also threatens to disrupt some existing financial institutions and professions, as e-commerce disrupted the retail landscape two decades ago.

      In fact, some exuberant pioneers and early participants have predicted that crowdfunding will spark a revolution in private capital markets, if not the redefinition of Wall Street.10 At this early stage, nobody can say definitively whether their exuberance is misplaced.

      It perplexes those pioneers, therefore, that so many people still have not even heard of crowdfunding, or have heard of it but barely understand how it works, or don't realize that there are big differences between the various kinds of crowdfunding.

      So we begin with a broad definition. Crowdfunding is a method of collecting many small contributions, by means of an online funding platform, to finance or capitalize a popular enterprise. It is a new, high-tech version of a centuries-old practice. As crowdfunding is so new, there is much confusion in the marketplace about it – for example, many people still think of Kickstarter as the epitome of crowdfunding. Kickstarter may be the prime example of rewards-based crowdfunding (which is the most popular kind today), but there are a few other distinct kinds of crowdfunding, including donation- and securities-based crowdfunding; the latter includes both debt-based and equity-based offering platforms. We will help you distinguish between them and, especially, learn what makes equity crowdfunding different from its ancestors.

      A classic example of old-fashioned (pre-Internet) crowdfunding is Joseph Pulitzer's campaign to finance the construction of a granite pedestal for the Statue of Liberty in 1885. France had donated the statue, designed by sculptor Frederic Auguste Bartholdi, to the United States to celebrate the friendship between the two countries and their mutual respect for republican ideals. After France shipped the statue to America in June 1885, it sat unassembled in a warehouse for a year while the pedestal was being built here. Construction of the pedestal had been delayed because the American Committee of the Statue of Liberty ran out of money for the project.

      The cost to build the pedestal and place the statue upon it was estimated at $300,000, but the American Committee could raise just over half of that. The State of New York refused to help fund it, as did the U.S. Congress.

      The cities of Baltimore, Boston, San Francisco, and Philadelphia offered to finance construction of the pedestal if the statue would be relocated. Pulitzer, the Hungarian-born publisher of the New York World newspaper, dearly wanted the statue to remain in his city, so he used the power of the press to urge New Yorkers to help fund the project. He wrote in the World, with a fair measure of accuracy, that construction of the statue itself had been paid for by many small donations from “the masses of the French people – by the working men, the tradesmen, the shop girls, the artisans – by all, irrespective of class or condition.” He made a dramatic appeal in his newspaper to the masses on this side of the Atlantic:

       Let us not wait for the millionaires to give us this money. It is not a gift from the millionaires of France to the millionaires of America, but a gift of the whole people of France to the whole people of America. 11

      Fund-raising activities sponsored by Pulitzer included boxing matches, art exhibitions, theater productions, and the sale of small statuettes of liberty for $1 (6 inches tall) and $5 (12 inches tall). The largest donors received commemorative gold coins.

      Within five months, the World collected $102,000 in donations (roughly $2.3 million in today's dollars), from 125,000 people, all of which it forwarded to the American Committee, and the pedestal project was revived. Most of the donations were in amounts of $1 or less.

      As a reward to donors, the World published their names, regardless of the dollar amount (which had the fortunate result of increasing the paper's circulation).

      The Statue of Liberty was assembled, mounted, and dedicated to America on October 28, 1886, in a ceremony presided over by President Grover Cleveland – who, ironically, as governor of New York, a year earlier had vetoed a plan to fund the pedestal project.

      The Internet Doesn't Change Everything

      That was the nineteenth-century version of crowdfunding, although the word didn't yet exist in the English language. The twenty-first-century version relies on the power of the Internet, of course – specifically, e-commerce and social networks merged into online funding platforms and portals.

      Although the technology is vastly different, in many ways Pulitzer's version of crowdfunding is strikingly similar to today's version. Both versions involve issuing emotional appeals via the most advanced mass dissemination tools of the time to crowds of ordinary (rather than just wealthy) supporters, most of whom contribute small amounts and receive rewards commensurate with their level of contribution. For some of those contributors, simply the satisfaction of helping a worthy project succeed is a significant benefit.

      But the Internet Changes Some Things

      You have probably heard of Joseph Pulitzer, more likely because of the Pulitzer Prize than his 1885 civic crowdfunding project. You have probably not heard of Brian Camelio, one of the pioneers of modern crowdfunding. A Boston musician and computer programmer, Camelio attended a West African dance show in 2000 and was amazed (and inspired) when people in the audience got up out of their seats, ran up to the stage, and literally threw money at the dancers.

      It occurred to Camelio that this method of funding artists provided a solution to the growing problem of piracy in the music industry. That is, once a digital version of a recording is published on the Internet, it's too easy for pirates to download it illegally, depriving the composer, recording artist, and/or producer of revenue that they deserve. Throwing money at a performing artist on stage certainly solves the problem on a very small scale, but what about the thousands of recording artists who haven't yet performed in public?

      Camelio developed a website where fans of a musician can figuratively throw money at the artist, in effect prepurchasing the recording (or other reward), before their digital recording was released. He named the site ArtistShare. Launched in 2003, ArtistShare's first crowdfunding project (which the ArtistShare team called “fan-funding” then) was Maria Schneider's jazz album Concert in the Garden. Through the funding platform, Schneider's fans could contribute money in specified amounts to help her compose and produce the album. Fans who contributed $9.95, for example, got to be among the first customers to download the album legally upon its release in 2004. Fans who contributed $250 or more (in addition to receiving an album download) were listed, in the booklet that accompanied the album, as Bronze Participants who “helped to make this recording possible.” One fan, who contributed $10,000, was (as specified in the ArtistShare campaign) listed as an executive producer and invited to dine with the artist at a New York restaurant; another, who contributed $18,000, went bird-watching with Schneider in Central Park, among other rewards.

      Schneider's ArtistShare campaign raised about $130,000, although neither Schneider nor Camelio is willing to disclose the number of contributors.12 That funding enabled the artist to compose the music, pay her musicians, rent a large recording studio, and produce and market the album (it was sold exclusively through the ArtistShare website), which won a 2005 Grammy Award for best large jazz ensemble album.

      ArtistShare still supports many musicians and composers in various genres, and also a small number of photographers and filmmakers, each of whom must submit an application and be selected before they can appear on the platform – in other words, the site is curated. The site enables artists to “share” their creative process with fans through innovative content management tools. Artists typically offer, in exchange for funding, such rewards as advance copies of CDs, “VIP access” СКАЧАТЬ